Hi Satish. The previous example I gave was hypothetical. I don't know the real numbers of the deal. I do know how some deals are handled, though. Obviously, every deal is different. However, a lot of times the two companies agree on a set price - let's say for example, $100. Now, let's say both companies agree that company A's shareholders will get $50 in cash and $50 in the stock of company B, for the sale of A to B.
If stock B is trading at $25 when the deal closes, then company B only has to give company A shareholders $50 and 2 shares. However, if company B is trading at $10, then company B has to give company A shareholders $50 and 5 shares.
The problem is that when a company (B) has to give out more shares because their shares are trading at a lower price on the closing date, this dilutes the value of your shares even more because the company's earnings will be divided by a larger outstanding share base. That means EPS will go down and the market value of your shares will go down IN THE NEAR TERM.
However, if the company that was purchased is making money, eventually, in the long term, its earnings will be accretive or added to the EPS of the acquiring company.
That is why the share price that Compaq is trading is important in the near term. |
